Abstract/Index

Wage setters take into account the future consequences of their current wage choices in the presence
of downward nominal wage rigidities. Several interesting implications arise. First, a closed-form solution
for a long-run Phillips curve relates average unemployment to average wage inflation; the curve is
virtually vertical for high inflation rates but becomes flatter as inflation declines. Second, macroeconomic
volatility shifts the Phillips curve outward, implying that stabilization policies can play an important
role in shaping the trade-off. Third, nominal wages tend to be endogenously rigid also upward, at low
inflation. Fourth, when inflation decreases, volatility of unemployment increases whereas the volatility
of inflation decreases: this implies a long-run trade-off also between the volatility of unemployment
and that of wage inflation.